Global Meltdown Reaches Houston, UH Economist Says

During his much-anticipated semi-annual forecast, Dr. Barton Smith, University of Houston economics professor and director of the Institute for Regional Forecasting (IRF), examined the likelihood of various alternative scenarios regarding the future of the global, national and local economies during these times of stress and fear. However, his primary focus was on how the global meltdown is now spreading its tentacles to Houston through dramatically lower energy prices and plummeting national exploration activity.

Smith’s sold-out presentation, “Houston Without Energy Growth: Implications for Jobs and Real Estate,” held at the Hyatt Regency Houston Hotel in downtown Houston, presented the newest economic statistics on the Houston economy as the local region joins the nation in shedding jobs. He shared his assessment of the severity and longevity of the current national and global economic crisis, whether recent policy initiatives are likely to turn the tide, and how in the interim Houston will weather this serious recession. He pointed out that national and global economic crises are not only affecting Houstonians in terms the value of their stock-oriented retirement plans, but is now beginning to affect the security of their home values and their local jobs.

While rejecting the notion of a depression, Smith said, “this current economic reversal will prove to be the worst recession since the ‘Great Depression’ and the road to recovery will likely be bumpy and extended.” Much of his presentation emphasized the reversal in Houston’s energy sector’s prospects, pointing out why the region’s energy boom will turn into an energy bust, at least as severe as the bust of the late 90s when oil prices temporarily fell below $10/barrel. “The prospects for the energy sector in the next few years are not very encouraging,” he said. “Houston survived 2008 because of energy. That cushion will be totally lost in 2009.”

As a consequence, Smith and his associates at UH’s Institute for Regional Forecasting see job losses in Houston over the next two years of approximately 56,000. “While that is nowhere near the severity of job losses during the energy bust of the 1980s, it will be the worst losses since those horrific times,” he said. “During the last mini energy bust of 1998-99, Houston lost almost 25,000 energy jobs, but continued to grow because of the strength of the national economy and, hence, the energy independent portion of Houston’s economy. This time there will be no source of job growth, just job losses. With the exception of government, virtually all sectors will experience at least some job losses.”

Equally important, Smith showed that for many of Houston area real estate markets, the timing of this economic reversal couldn’t have come at a worse time because there is plenty of new retail and office space coming on line this year. Surprisingly, Smith suggests that the local home market, which has been hammered by foreclosures and falling sales, may prove to be one of the stronger of the region’s real estate markets. Smith said that “despite the fact that the local recession is just now beginning to unfold, this year may be the best time to buy a home for Houstonians who can clearly qualify for owner-occupied housing because of extremely low interest rates that won’t last much beyond this year.”

Here in Houston, Smith said the positive press coverage last summer led many to believe that Houston was immune to the nation’s economic woes and the new local economic environment will catch many by surprise. It will also disappoint many migrant workers coming from other states who were led to believe that jobs were easy to find here.

Smith also pointed out that Houston often lags behind in the nation in terms of falling into a recession and as a consequence is also slow in beginning to recover. Several steps will have to take place to change Houston’s near-term fortunes:

The U.S. economy must begin to recover

The U.S. recovery must become strong enough to spill over to the global economy

Renewed strength in the global economy must become mature enough to reverse the weakness in energy demand and prices

As energy prices begin to recover, so will oil and natural gas exploration, but as usual, there is typically a 1 year lag before high prices result in high exploration activity

Thus, Smith says, “Don’t expect a quick turnaround in the local economy. It is going to take some time for Houston to regain its gusto of the past four years.”

Smith offered a bit of advice for President Obama. “You’ve now done enough to stem the tide in the short run. Now focus on the long-run issues that must be resolved to give any permanency to the recovery that should begin to emerge by the end of the year.” In particular, Smith stressed true regulatory and tax reform, a rational energy policy and, perhaps most importantly, a plan for balancing the budget. “Promising Americans that you’ll eventually cut the deficit in half won’t do it. There needs to be an absolute commitment to eliminating it.”

Smith has conducted numerous studies on urban issues, housing, transportation and the environment. During the past 20 years, he has gained national recognition for his analyses of the Houston economy and real estate markets. Smith wrote “Handbook on the Houston Economy” and continues to present and publish two symposium reports a year on Houston’s economy and real estate markets. For more information, go to http://www.uh.edu/irf/index.htm.

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